Answer to Question #134311 in Macroeconomics for Amutha

Question

Column Cooperate Defect Cooperate 10, 10 0, 14 Row Defect 14,0 2,2 Suppose that Row and Column are completely self-interested and interact in a one-shot game. 1. What strategy would you expect each player to play? Why? 2. If there is an outcome of a game where there is not another outcome in which at least one player could be better off and no player worse off, we call that outcome “efficient”. Is this outcome such that there is no way to make either player better off without harming the other player? Why or why not?

Answer 1

In prisoner's dilemna two players play a simultaneous game without observing the choices of other .Here we will get the payoffs according to the advantages of each players .

1. Urow(coop , coop)=10 = Ucol(coop, coop) , Urow(coop,def) =14 = Ucol(def,coop)

  Urow(def,coop)=14 = Ucol(coop, def) ,  Urow (def,def)= 2 = Ucol(def, def)

2. we would expect each player to cooperate and go for strategies Urow(coop , coop)=Ucol(coop, coop)=10 where both the player is better off and it is the pareto optimum solution (superior/optimal).

3. In this problem, if column (col) chooses to coor , best response of row will be defect.

                         if col chooses defect, best response of row will be defect

similarly, if row chooses to cooperate , best response of col will be defect

and if row chooses defect then best response of col will be defect.

Thus the nash equilibrium is strategy (defect, defect) =(2,2). Here in prisoners dilemna the nash equilibrium is pareto dominated ( inferior/sub-optimal),as no players have knowledge about each others strategy and thereby they never reaches to their best possible strategy which is strategy (coor, coor ). However the nash equilibrium is stable and no players will be willing to divert from it as it will not be profitable